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IRS GIVES CREDIT FOR PAID FAMILY AND MEDICAL LEAVE

November 6, 2018

IRS GIVES CREDIT FOR PAID FAMILY AND MEDICAL LEAVE

As part of the Tax Cuts and Jobs Act signed into law in December 2017, the new law grants a tax credit for 2018 and 2019 for employers that voluntarily offer paid family and medical leave. To qualify for the credit, the employer's leave program must satisfy the following requirements:

  • Be in writing
  • Permit qualifying full-time employees to take at least two weeks of annual paid family and medical leave (and allow part-time employees to take a commensurate amount of leave on a pro rata basis)
  • Provide for benefits during the period of leave equal to at least 50 percent of normal wages

The credit for the paid leave is calculated at the applicable percentage of wages paid to qualifying employees during the period of the qualifying leave. The applicable percentage starts at a base of 12.5 percent and increases .25 percent for each percentage point by which the rate of payment exceeds 50 percent and is capped at 25 percent.

Example of credit - Joe is paid $10,000 during his qualifying leave which is equal to 50% of his normal pay. The employer would be eligible for a credit of $1,250 ($10,000 * 12.5%). If instead Joe is paid $15,000, which represents 75% of his normal pay, then the credit percentage is increased by 6.25% (.25% times the percentage points the pay is in excess of 50% [(75-50)*.25%] for a total credit percentage of 18.75% resulting in a credit of $2,812.50 ($15,000*18.75%).

The IRS has released various clarifications relating to credit addressing which employers are eligible to claim the credit, what constitutes covered "family and medical leave", what must be in the written policy to claim the credit, and how to calculate and claim the credit. Some of the key clarifications are as follows:

  • An eligible employer must have a written policy in place before the paid family and medical leave for which the employer claims the credit is taken. However, for an employer's first tax year beginning after December 31, 2017, the written leave policy (or amendment to a new or existing policy) will be considered in place as of the effective date of the policy or amendment, rather than a later adoption date, provided certain requirements are met. 
  • For purposes of the code section, "family and medical leave' is defined the same as it is for the federal Family and Medical Leave Act (FMLA). 
  • Only leave designated specifically for one or more FMLA purposes, and that may not be used for any other purposes, is eligible for the credit. However, if a written policy provides leave that would otherwise qualify for FMLA purposes except that the leave is available to care for additional individuals other than FMLA individuals, the policy will still be considered, but only the leave paid for FMLA individuals will be eligible for the credit. 
  • Although an employer's leave policy may set different pay rates and periods for all FMLA purposes, only those FMLA purposes for which the policy's pay rate and period meet the requirements under the code are eligible to be considered for the credit.

The IRS is expected to issue additional guidance in the future through proposed regulations, but in the interim, Notice 2018-71 clarifies some of the requirements of the credit. Should you have any questions, please contact us in one of our many locations.

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